Impact Of Foreign Direct Investment On Domestic Innovations In Developing Economies: Moderating Role Of Country-Level Governance

Hannarong Shamsub (1)
(1) Executive Office, Thailand Institute of Nuclear Technology, Bangkok, Thailand , Thailand

Abstract

Purpose of the study: While most studies in the existing literature investigated the impact of Foreign direct investment (FDI) on innovation, this paper examines further to see whether country-level governance moderates the relationship between the two in developing economies.


Methodology: We gathered information from the World Bank Development Indicators and Worldwide Governance Indicators databases (2019). From 1995 to 2019, the panel data covers a 25-year time series of 55 developing countries. The GMM system is used to estimate this panel dataset.


Main Findings: The findings of the study show that three of the six governance variables, political stability, the rule of law, and voice and accountability, have moderating effects on the impact of FDI on innovation. The findings show that traditional policy prescriptions, such as increasing government R&D expenditure and education to encourage FDI's innovation spillovers, may be insufficient in the absence of improvements in governance quality.


Research limitations/implications: To maximise the impact of FDI on local innovation, developing-country governments should improve governance quality, particularly political stability, the rule of law, and voice and accountability. This is because the effects of FDI on innovation are amplified by those three governance indicators. The study's major limitation is that it has not yet investigated the potential mediating effects of governance variables; instead, it focuses solely on moderating effects. This leaves room for future investigation.


Novelty/origin of this study: This is one of the few studies that look at the role of governance indicators in moderating the relationship between inward FDI and innovation. The paper's primary contribution is the discovery that three governance variables, namely political stability, the rule of law, and voice and accountability, strengthen the positive relationship between inward FDI and innovation. These factors magnify the impact of FDI on innovation in developing economies.

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Authors

Hannarong Shamsub
hannarong.shamsub@gmail.com (Primary Contact)
Shamsub, H. (2023). Impact Of Foreign Direct Investment On Domestic Innovations In Developing Economies: Moderating Role Of Country-Level Governance. Innovation Journal of Social Sciences and Economic Review, 5(1), 1–10. https://doi.org/10.36923/ijsser.v5i1.179

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